TransUnion – an international credit information provider – has predicted that mortgage delinquency rates will drop in 2013.
That news should come to no surprise to anyone that’s been paying attention. Before talking about the reasons why it’s no surprise that delinquency rates dropped this year and are predicted to keep falling in 2013, let’s have a look at some of TransUnion’s take on things.
TransUnion officials state the normal delinquency rate is between 1.5 percent and 2 percent. The rate peaked in the fourth quarter of 2009 when 6.89 percent of mortgage holders were delinquent in their payments. That rate fell to 5.41 percent by the end of the third quarter this year and TransUnion believes the rate will drop to 5.06 percent by the end of 2013.
For the record, the lowest delinquency in recent history was 1.94 percent in the second quarter of 2006. The delinquency rate, of course, is an important statistic to track because more than a few delinquencies turn into foreclosures.
Kathy Deck, the director of the Center for Economic Research at the University of Arkansas, said a couple of years ago there was a very good reason for high delinquency rates – a lot of bad loans were issued by the now mostly subprime mortgage industry. By the middle of 2007, the subprime mortgage industry had all but vanished as high foreclosure rates drove lenders into bankruptcy.
Deck said the companies that made those loans may have vanished, but the mortgages were still out there and would still pose a threat in the years to come. Why? Let’s say someone took out a subprime mortgage in 2007 just prior to the collapse of the market. That mortgage was a fairly common one at the time – an adjustable rate mortgage with very low interest rates that would reset in five years.
In early 2012, the loan reset and the borrower found himself facing the prospect of making a significantly higher monthly payment. Throw in a struggling economy and home prices that were lower than they were in 2007 and you’ve got a recipe for trouble. The borrower might be able to handle the higher mortgage payment or may be in a position to refinance at a more favorable, fixed-interest mortgage.
If the borrower, on the other hand, was struggling with finances, was unable to refinance or couldn’t sell the home for more than was owed on it, then you’re talking about a typical foreclosure scenario. Sure, the home owner may have been able to make some payments for some time, but there was the risk that the mortgage would fall into delinquency and eventually foreclosure.
We’re at the point now where a lot of those subprime mortgages have stabilized. A good number of them went through the foreclosure process, other borrowers were able to refinance, others could handle the new payments and some sold their homes. There are still some of those mortgages to contend with, but the number of them has declined while the number of more traditional and more reliable mortgages has increased.
In other words, Deck was right in saying foreclosure rates would fall as subprime mortgages worked through the system.
And that’s good news for homeowners. Why? Record numbers of foreclosures pulled down property values and left more than a few people in a bind when they wanted to sell their houses. As foreclosures decline, then property values should become more stable in the months and years to come.
The lessons from the subprime mortgage mess are fairly basic. Bad loans can hurt housing markets for several years and it’s a good idea for banks to loan money to people who will probably be able to handle their mortgage payments throughout the length of the loan. Fortunately, lenders have concentrated on lower risk mortgages since the death of the subprime mortgage market, so it’s safe to assume we’ll continue to see delinquency rates fall.
Home Sweet Home is distributed weekly by the Mortgage Bankers Association of Arkansas. Visit the Association on the Internet at mbaar.org.